Austria Tax Alert - 24 September 2012
EU/EEA companies may benefit from special dividend withholding tax refund procedure in “Denkavit” situations
By Erwin Holzer and Patrick Weninger
Corporate taxpayers resident in an EU/EEA member state may be entitled to receive a refund of Austrian withholding tax levied on dividends as far back as 2007 for refund claims submitted in 2012 under a special reimbursement procedure under Austrian law. The withholding tax concerned is not withholding tax that is refundable under a tax treaty, but withholding tax that is refundable according to jurisprudence of the European Court of Justice (ECJ) regarding nondiscrimination under EU law.
The refund opportunity arises from several ECJ decisions, in which the court held that the levy of a withholding tax on dividends paid to foreign shareholders is a restriction of the fundamental freedoms when such dividends would not be taxed if paid to a comparable domestic entity (e.g. Denkavit C-170/05, Amurta C-379/05, Aberdeen Property Fininvest Alpha Oy C-303/0 and Santander Asset Management et al C-338/11, C-347/11). Thus, nonresidents that have suffered discriminatory taxation on dividends paid by companies resident in EU/EEA member states in theory can file claims for a reimbursement of withholding tax paid.
The ECJ held in Denkavit that taxing dividends distributed to a foreign shareholder of a French company more heavily than dividends distributed to a French shareholder violates the freedom of establishment principle in the EU treaty. However, the Court suggested that there would not be any discriminatory taxation if the tax withheld resulted in a tax credit in the shareholder’s country of residence. In Amurta, the ECJ ruled that the Dutch withholding tax on dividends paid by a Dutch company to a Portuguese shareholder holding 14% of the shares of the Dutch company, in a situation where the withholding tax would not have been applicable on dividends paid to a Dutch resident shareholder, was a restriction on the free movement of capital. (The scope of the free movement of capital principle is broader than that of the freedom of establishment principle because it prohibits restrictions between EU member states, as well as between member states and third countries). The court ruled in Aberdeen that the Finnish tax regime, which taxes dividends paid to Luxembourg SICAVS, but not similar payments made to Finnish parent companies or funds, is discriminatory. And in Santander, the ECJ held that the French withholding tax levied on dividends paid by French companies to nonresident investment vehicles is not compatible with EU law and, therefore, the nonresident funds were entitled to a full refund of the French tax withheld on French-source portfolio dividends.
Despite the settled ECJ case law, most EU countries still refuse to grant a refund or they impose onerous formalities that make a successful reimbursement claim nearly impossible. Austria is one of the few EU member states that has actually introduced a special “Denkavit” reimbursement procedure (section 21(1)(1a) of the Corporate Income Tax Act) to specifically conform Austrian tax law to ECJ jurisprudence.
Under the special procedure, a corporate taxpayer subject to limited tax liability in Austria and resident in an EU/EEA member state (the latter provided a comprehensive information and recovery assistance agreement exists with Austria) can request a refund of Austrian withholding tax on dividends, provided it can demonstrate that the Austrian withholding tax is not creditable in whole or in part. If the conditions for a reimbursement are satisfied (i.e. if the taxpayer can show that tax was levied in a discriminatory manner in the source state and it cannot be credited in the recipient’s state of residence), the Austrian tax authorities will refund the withholding tax that was levied in a discriminatory manner within a reasonable period of time and without imposing any burdensome formalities.
Since the free movement of capital principle also prohibits restrictions between EU member states and third countries, it could be argued that corporate taxpayers not resident in an EU/EEA member state may be entitled to receive a refund even though this is not provided for in the law. However, the chances of success would thus be lower for third-country applicants.
Affected companies should act now to ensure they file claims. The statute of limitations to request a refund is five calendar years from the end of the year in which the tax was withheld. As a result, tax withheld in 2007 may be included in a refund application filed by the end of 2012. All refund applications must be submitted to the same Austrian tax office. While taxpayers may be able to handle preparing the necessary documentation, professional advice may be needed, in particular, to ensure that the legal form of the applicant is comparable to an Austrian corporate taxpayer (i.e. banks, insurance companies, pension funds, etc.) since mere investment vehicles may not be accepted as applicants due to Austria’s look-through approach.